Are Student Loans the Next Bubble to Burst?

For the past five years, politicians and economists have been keeping a sharp eye on the mortgage default rate as the bellwether for how the nation’s economy is faring. Now there’s a new number experts say legislators should keep an eye on—the student loan default rate—and it’s going up.

In the second quarter of 2012, according to the Federal Reserve Bank of New York, student loan debt had increased by $303 billion from the third quarter of 2008, when total household debt was at its highest. Other forms of debt, meanwhile, decreased by $1.6 trillion in the same time. Defaults on student loans also increased for the second consecutive quarter, rising to 8.9 percent.

The Great Recession, decreases in state funding and rapid increases in tuition rates have combined to make it much harder for students to make it out of college debt free. That can have a major economic impact not only on students, but also on states.

State Funding vs. Tuition

Andy Carlson, policy analyst with the association of State Higher Education Executive Officers, said state funding for higher education is keeping up with either inflation or with the rapid increase in the number of students attending since the start of the Great Recession, but it’s not keeping up with both.

“The share of overall higher education support coming from tuition is increasing,” Carlson said. “I think it’s a trend that happens during each (economic) downturn. For a lot of states, higher education is the largest major budget area that can be reduced. If you reduce other areas, you’re going to lose federal dollars as well. Politically, it’s much more difficult to reduce funding for K-12 education. The argument for reducing funding for higher education is they can always raise tuition.”

And increase it has. According to the Delta Cost Project at the American Institutes for Research, an independent, nonprofit group dedicated to using science to enhance everyday life, tuition rates at public four-year colleges increased more than 200 percent between 1970 and 2010. Tuition at two-year public institutions increased by 125 percent. During the same time, the median family income rose by just 22 percent.

Steve Hurlburt, deputy director of the Delta Cost Project, said public research and master’s degree institutions now get a greater percentage of their funding from tuition than state and local appropriations.

“For years, it’s been heading in that direction, but the lines have actually crossed at this point,” he said. “It’s basically a story of cost shifting. They (universities and colleges) need to cover their costs somehow.”

Student Debt Upswing

So with college tuition increasing and family incomes stagnating, student debt is a fact of life for most college graduates.

The Project on Student Debt estimated that two-thirds of the graduating college seniors in 2010 had student loan debt, with an average debt of more than $25,000, up 5 percent from the previous year. The Project on Student Debt is an initiative of The Institute for College Access & Success, an independent, nonprofit organization dedicated to making higher education accessible and affordable.

“I think no question, student loans have become a fact of life for more and more Americans,” said Lauren Asher, president of The Institute for College Access & Success. “A Pell Grant will cover just less than one-third of the average cost of going to a public four-year college in state, which is the lowest in the program’s history. In the ’70s, it covered more than 70 percent. The same student from the same lower-income family, working just as hard going to the same school, most likely will have to borrow when they wouldn’t have to a generation ago.”

North Carolina State Treasurer Janet Cowell said that kind of student loan debt and the defaults that go along with it is bad for all concerned.

“It’s a bad personal outcome, obviously, for the individual involved,” she said. “It’s also a bad public policy outcome in that those individuals, clearly because of that sort of credit history, would have a harder time seeking future employment. Clearly, it probably means they have a harder time seeking current employment. It’s a drag on the overall economic growth if you have individuals or families weighted down by debt or defaulting on debt.”

Carlson said there are things policymakers can do to keep higher education affordable. Policymakers need to take a holistic look at the budgeting process when it comes to higher education, he said.

“I think traditionally, a state allocates general fund revenue to their institutions (of higher education),” Carlson said. “They set some overarching tuition policy and then they set aside some leftover money for financial aid. Those three things occur separately and distinctly without considering the other two.

“I think states need to do a better job understanding how those are interrelated. States could decide if there’s going to be a reduction in state support, that’s going to need to be followed up by a tuition increase of such-and-such percent, then they need to increase state aid. All three of those are decided on at once.”